Unfortunately, outstanding medical bills or career changes may have derailed plans for some to stash away college funds for a child’s future. In these cases, there are no easy solutions for parents but there are ways to fund a child’s college education without impacting a parent’s own financial future. Let’s take a look at some of these steps and techniques available for parents that are coming in late to the game.
What is Possible?
Parents need to consider how much money can be safely allocated to the college fund of each child. Over the past decade, tuition costs have risen an average of 5 percent annually. A feasible plan or future financial forecast is necessary to account for the current and future costs of college for a child and matched up with an appropriate funding level. Advisers can help parents with tough financial decisions and ask meaningful questions to clarify each situation that may arise.
There are many routes to a college degree; but, they come at different price points. The College Board reported the average tuition and fees to be:
- $32,405 for a private educational institution;
- $23,893 at state universities for out-of-state students; and
- $9,140 for a student staying in-state and enrolled in a four-year public college.
Community colleges are also a popular and inexpensive strategy (average annual cost of $3,435), with students then transferring to a different school to complete their degree. Families will need to balance any potential loan burdens with the funding that they will provide and understand all of their future financial commitments of the student.
Consider Tax-friendly Choices
Families that only have a couple of years can establish savings in a few ways. The pressure should not be placed solely on the shoulders of parents. Financial advisers suggest that the student establish and fund a Roth IRA with the student’s own earned income. These types of contributions can be withdrawn and used toward college or another purpose tax-free and without penalty. Remaining funds and earnings continue to grow tax-free toward the student’s retirement. The student can contribute up to a maximum amount of $5,500 in 2016.
Parents may want to open up a savings vehicle, called a 529 college savings plan. This is useful for those that only have a few years until a child is ready to go off to college and many will see far greater benefits when they can invest for a decade or more. Many 529 college savings plans have state tax deductions (and / or credits). Most plans offer age-based investment options which become more conservative as the time nears to withdraw funds for college.
Retirement Monies NOT For College
Families should be counseled against taking out money from a parent’s individual retirement account (IRA) or 401(k) to pay for a college education. There are loans, financial aid and grants available for college if need be.
One other important consideration: the potential earning power of graduates from specific schools can be determined using the online resource, https://collegescorecard.ed.gov/.
In conclusion, look for an adviser that can help with the financial modeling necessary to realistically fund an appropriate selection in a college education for each child and / or grandchild.
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